Lawyers, Beer, and Money: the CRTC’s broadband imbroglio.

September 6, 2022

I don’t often write about telecommunications policy on MediaPolicy.ca. I prefer to comment on policy matters about media rather than the pipe that distributes it.

But Canadian public policy governing media and their distributors have a lot in common: a regulator in the CRTC, vertically integrated media companies owning both pipe and content, and a small army of consumer advocates and independent communications companies antagonistic towards those large companies.

This brings me to the CRTC file concerned with “wholesale Internet broadband” pricing. Now under appeal to federal court, it has become an iconic regulatory fight. 

The fact that the file is associated with BeerGate —the controversy over CRTC Chair Ian Scott and Bell CEO Mirko Bibic having a cold one at an Ottawa pub— makes this scrap even more intense.

Many have a strong opinions about Internet broadband (and also wireless mobility) prices. 

But it’s difficult for the casual observer to drill down to an informed opinion about the CRTC’s “just and reasonable” wholesale prices that retail service providers (“re-sellers,” in effect) like TekSavvy and Distributel pay to piggyback onto the networks of the big telco and cable companies. (Ironically, Distributel was purchased last week by Bell).

CRTC rulings on wholesale pricing can be opaque, obscured by the industry jargon describing the network technology and architectures (which can differ by company and between telcos and cablecos) and the dark art of CRTC costing methods.

As a public service of sorts, I thought I would offer a digestible account of what is going on. This might come in handy when we get appeal rulings. There is no date set as yet for the Court of Appeal. As there are hundreds of millions of dollars at stake in the dispute, it will likely go all the way to the Supreme Court.

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Modern telco networks require multi-billion-dollar investments. All to chase the same customers. 

So perhaps it is not surprising we have a market dominated by a few large companies. Contrary to popular belief, foreign telcos are welcome to set up shop in Canada and build their own networks. They don’t because of the daunting capital cost of market entry to build fibre networks in a country with a large landmass and a small population. 

That’s why it’s been federal policy for two decades under one Conservative and two Liberal administrations to mitigate the market power of the big Canadian telcos by enabling smaller ones to rent carriage on their networks. 

The CRTC sets Internet broadband wholesale prices under the authority of the Telecommunications Act but also under the general guidance of federal cabinet policy dating back to Harper-era Minister Maxime Bernier who in 2006 instructed the CRTC to “promote competition, affordability, consumer interests and innovation” but to lean heavily upon “market forces.” 

Or as the current Liberal Minister François-Phillipe Champagne said in the most recent iteration of that policy in May 2022, the CRTC must find the sweet spot between “the need to invest in our networks and the need to promote continued competition and affordability.”

Maybe it’s not surprising that wherever the CRTC identifies that sweet spot, it’s controversial.

The CRTC’s May 2021 ruling on “just and reasonable” wholesale broadband rates reversed its August 2019 decision that had made a second rate cut in four years (the first came in October 2016). 

That enraged re-seller telcos like TekSavvy and Distributel, their supporting cast of critics, and even a former chair of the CRTC who said he was “stunned” by the reversal.

The 2021 decision came about after the telcos used all three channels available in the Telecommunications Act to appeal the 2019 Decision: to the courts, to cabinet (on the basis of its guiding telecom policy) and to the CRTC itself in a “review and vary” application, ordinarily a long shot in regulatory matters. 

The court ruled that the CRTC did not make an error of law.

But in August 2020 the federal cabinet responded that the 2019 rate cut wasn’t sufficiently mindful of the big telcos’ burden of investment, saying “Canada’s future depends on connectivity”. Then Minister Navdeep Bains kicked the file back to the CRTC which was set to consider the telcos’ review and vary appeal.

The CRTC’s 2021 review and vary ruling (the one that TekSavvy is now appealing to federal court) is 68 pages long and easy to read if you are both a regulatory lawyer and a fibre network technician.

Let’s try to render it comprehensible for us ordinary mortals.

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The Commission’s decision retells the history of the federal government and the CRTC plotting a course to create more competition in Internet broadband services by encouraging re-sellers who don’t have the spare billions to build their own networks. Distributel (200,000 customers) and TekSavvy (270,000) emerged as the leaders in the biggest market, Ontario. 

As early as 2008 the CRTC created its revised regulatory framework for wholesale services and definition of essential service. 

A cost accounting method known as “Phase II” spat out a pair of wholesale rates: an “Access” rate measuring the number of re-sellers’ customers hooking up to the network and a “Capacity” rate calibrated to the extra flow of network traffic, passing through “transport” routing equipment at waystations located across the network.

Those two rates had been set by the CRTC in 2011 —to cover the next ten years— at a variety of rates for different telcos. To take an example, the key wholesale rates for the Bell network were set at $25.00 per customer for Access and $2,213 per 100 mbps for Capacity (varied in 2013 to $25.62 and $1036).

By midway through the decade a lot had changed in the industry, including the cost of network technology, and the re-sellers in 2015 asked the CRTC to reopen wholesale rates and implement a further rate cut.

The CRTC was disposed to give it to them, but in two steps. 

First, on an Interim basis the Commission tweaked some of the costing inputs used in the Phase II rate-setting method. The result was that Access rates remained the same, but the CRTC delivered some shock therapy by cutting Capacity rates from $1036 to $148 per 100 mbps, an 85% reduction. 

It appeared to help re-sellers: in the three years following the implementation of the 2016 rates the re-sellers would increase their customer base by 23% (compared to 4% for cable and 7% for telcos).

The Commission also promised Final rates and launched a lengthy hearing to gather evidence and do the costing analysis. Three years later in August 2019 the Commission reduced the Access rate again and further slashed the Capacity rate from $148 to $102.

The telcos immediately appealed to the federal court and obtained a “stay” putting the rate cuts on hold. In time, both the Federal and Supreme Court denied their judicial appeals, which only examined whether the CRTC has committed an error in law. 

But the telcos also petitioned federal cabinet and as mentioned above cabinet didn’t like the rate cut and so in August 2020 Minister Bains sent the rates back to the Commission, which was already considering the review and vary motion from the telcos. 

So far, so comprehensible. But some more context before we continue. 

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Part of the CRTC’s original plan to create more retail competition was to order the telcos to sell wholesale access to the re-sellers in an “aggregated wholesale” model in which the telcos provided turnkey access to the re-sellers, throughout their networks from core to customer premises. Under this plan, wholesale-based service providers only needed to connect at one or two places in a network in order to sell service to any premise in the entire province.

But in the long term this aggregated model was to sunset: re-sellers would be expected to move to a “disaggregated” model. This would mean installing their own transport equipment mid-way through the core-to-premises network, at hundreds of local points of contact in each of those provincial networks, like at the knuckle joints in a human hand but with a lot more fingers. 

The regulatory wisdom behind forcing the re-sellers to a disaggregated set-up was that it would provide more competitive market conditions and encourage them to put more skin in the game of capital spending.

The transition to disaggregated wholesale rates was supposed to happen on the third anniversary of the Commission setting disaggregated rates but very little progress had been made on the transition by the time the 2019 or even the 2021 rates were issued for aggregated wholesaling.

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All of that context of aggregated and disaggregated rates became important in the 2021 ruling that cancelled the deep rate cuts from the 2019 ruling because in the 2021 ruling the Commission decided not to carry out a detailed recalculation of the complex cost analysis done in 2019. 

Here’s why.

The Commission first examined a lengthy list of costing errors the telcos claimed were made in the 2019 ruling and agreed with each one of them. The 2019 rates it seems were riddled with errors.

But instead of launching yet another legal proceeding to work the corrected inputs through the Phase II costing model to produce revised aggregated rates, the Commission defaulted to the higher Interim rates from 2016, with a few modest downward adjustments. 

The Commission gave a host of reasons for doing so (you can read them at paragraphs 289-305) but two especially:

Foremost, the Commission projected that any recalculated Access and Capacity rates that the re-sellers would have to pay were likely to be similar to the 2016 rates they were already paying, maybe even higher.  

Given that projected result, the Commission decided that all of the players —-the telcos, the re-sellers and the Commission itself— needed to focus all of their time and resources on completing the transition to the disaggregated model. 

The Commission made the 2016 Interim rates final (with one caveat, below).

This didn’t mean the re-sellers owed the telcos any of the hundreds of millions at stake: the “stay” freezing the 2016 rates had seen to that. 

But as a side-issue the Commission ordered Bell to refund $44 million to the re-sellers as a result of cancelling a 10% “mark-up” rate that the re-sellers had been paying Bell since 2016 for access to a special part of its network.

That meant that after integrating the repeal of that special mark-up, the 2021 wholesale rates for re-seller access were in fact reductions of the 2016 rates from $148 to $138, instead of the 2019 cut from $148 to $102. 

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The re-sellers responded to the 2021 ruling in the same manner as the telcos had reacted to the 2019 ruling: the biggest re-seller TekSavvy appealed to the federal court, and the re-sellers petitioned the federal cabinet to overturn the ruling on policy grounds (rejected by Minister Champagne in May 2022).

Appealing the rulings of administrative tribunals to the courts is difficult. 

That’s because Parliament sets up administrative tribunals to specialize in the fact, policy and law of their chosen regulatory field. An appeal from a tribunal like the CRTC to a court is restricted to errors of law: situations where the tribunal is found not to have obeyed its governing statute, in this case the Telecommunications Act.

Can TekSavvy convince the Court of Appeal that the CRTC has disobeyed the Telecommunications Act in reaching its controversial 2021 ruling?

The legal factums were filed by TekSavvy and the telcos at the Federal Court of Appeal this summer and they are interesting.

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TekSavvy’s first argument is the Commission’s 2021 ruling did not meet “legitimate expectations” of a fair process.  

TekSavvy says the Commission blind-sided them at least two different ways. 

First by telling re-sellers in the 2016 hearing that led to the Interim rates that they didn’t need to submit evidence supporting their position: yet now the 2016 rates have been confirmed as final based on uncorrected errors in the 2019 ruling.

Second by telling participants in the 2016 hearing that final rates would eventually be established after a “full and comprehensive review” of the 2011 rates, inducing  TekSavvy to keep its powder dry and accept the expediently set Interim rates.

Bell’s rebuttal to TekSavvy’s fairness arguments will probably be enough: the Commission did perform a full and comprehensive review of the 2011 rates during the 2019 proceeding in which TekSavvy participated and submitted all of the evidence it wanted. 

The fact that the 2019 results were abandoned in favour of defaulting to the 2016 rates doesn’t change the fact that TekSavvy was given the opportunity to take its best shot and did so.

TekSavvy’s second argument is that the Commission failed to obey the instructions in section 27(5) of the Telecommunications Act to use a “method or technique” (i.e. Phase II costing) to generate final wholesale rates. TekSavvy characterizes the CRTC’s default to the 2016 rates as failing to use any method at all.

Bell’s reply is that the Commission based its 2011, 2016 and 2019 rates on the Phase II costing method. It’s 2021 decision not to re-input corrected costing assumptions into the Phase II model doesn’t change the fact that the rates are built on a recognized costing method.

And this is what the appeal really comes down to: will the Court accept the Commission’s reasons for not correcting the errant 2019 rates on the grounds —and the Court may well defer to the Commission’s judgment on this— that the CRTC was satisfied from what it learned during the 2019 and 2021 hearings that the 2016 rates were at least as generous to the re-sellers as redone 2019 rates would be. Also the Commission believed it would be a waste of regulatory resources to perfect the 2019 rates given the anticipated transition from aggregated to disaggregated networks.

(Another ironic moment: the Liberal cabinet’s May 2022 denial of TekSavvy’s petition was accompanied by a new Policy Directive instructing the CRTC to delay the sunsetting of aggregated rates until re-sellers can compete on a disaggregated basis in “a broad, sustainable and meaningful” manner).

TekSavvy’s last shot at winning the appeal is the most salacious. 

It’s BeerGate.

TekSavvy is asking the court to invalidate the 2021 ruling based on the legal doctrine of reasonable apprehension of bias on the part of CRTC Chair Scott (one of nine commissioners who made the ruling).

The supporting facts are that Scott held numerous lobby meetings with Bell and other telecommunications companies on his own; that he gave a speech to the Canadian Club in which he expressed “a preference for facilities-based competition” (meaning telcos that build their own networks); and that he had an unchaperoned meeting with Bell COO Mirko Bibic in McGee’s Pub only a week after Bell had filed its review and vary application to overturn the 2019 rates. 

TekSavvy says the bias is self-evident and that might be the gut reaction of many observers. 

But from a legal perspective it’s very much an uphill battle. Putting aside judicial precedents that set a high bar to establish bias, lobbying on Parliament Hill is so well accepted it has its own federal statute that sets up rules and a meeting registry. 

There isn’t any rule against one-on-one meetings even if common sense suggests it’s a good precaution, especially where the regulator is also an adjudicator. 

And there is no rule against lobbying in a bar even though in this case the BeerGate appointment started out as a social meeting (Bibic was the incoming CEO of Bell) and ended up being registered as a lobby meeting after Bibic began talking to Scott about Bell Media’s plan to expand its broadcasting footprint in Québec.

As for Scott’s Canadian Club speech, Scott’s preference for “facilities-based competition” has been Commission and cabinet policy since 1992 (with caveats about the value of re-seller competition, which Scott referenced later in his speech).

The federal Ethics Commissioner Mario Dion cleared Scott under the Conflict of Interest Act because he accepted that Scott and Bibic were not “friends” and therefore the BeerGate meeting did not violate that legislation. TekSavvy was smoked by that, arguing Dion should not have taken Scott’s word for it.

But Dion’s ruling doesn’t bind the Court of Appeal where a judge could still decide the pub rendezvous is too icky to be tolerated. On the other hand, a federal court judge slapping down the Chair of a major federal tribunal is unprecedented. The bias issue remains a wild card.

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It may be several months before the Aggregated Wholesale appeals conclude. 

But it’s only one chapter in a serial novel about industry regulation that has a flare for the dramatic.

If you want to follow it in more detail than the occasional news story in the mainstream press you can buy a subscription to Cartt.ca (about $150 per year) or follow the unpaywalled Telecom Trends written by Mark Goldberg.